HW10_Ch10_Ch9_Key

# HW10_Ch10_Ch9_Key - SRAS to decrease and the LM curve to...

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#2 Explanation: We start at GE1 in each graph. The positive productivity shock causes an upward shift in the production function and therefore an increase in labor demand. This causes an upward shift in the production function and therefore an increase in labor demand. This causes an increase in output, employment, and wage. The increase in output causes the FE curve to shift to the right and the LRAS curve to shift to the right. This increase in output also causes an increase in the savings curve, which causes the interest rate to decrease in order to maintain equilibrium in the goods market. Therefore, the level of investment also increases (shift along the curve), and consumption increases (because of the increase in output). Because the AD curve doesn’t shift, the price level must decrease in order for the additional output to be purchased. This causes
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Unformatted text preview: SRAS to decrease and the LM curve to shift to the right, thus regaining General Equilibrium at point GE2 in each graph. #3 Explanation: We start at GE1 in each graph. The higher MPKf causes investment to increase, shifting the curve to the right. In order to maintain equilibrium in the goods market, the interest rate must rise. This causes the IS curve to shift up and to the right. Because of the increase in investment, the AD curve shifts up. Because there is an “excess demand” in the economy, the price level must rise to regain general equilibrium. This increase in the price level causes the SRAS curve to shift up and the LM curve to shift to the left, thus regaining general equilibrium at point GE2 in each graph....
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HW10_Ch10_Ch9_Key - SRAS to decrease and the LM curve to...

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